‘Inheritance tax set for a comeback after 35 years’

By Anjana Das

New Delhi, July 3 (IANS) A tax on properties, jewellery, shares, fixed deposits (FDs), cash in bank inherited is likely in the upcoming Union Budget, official sources here said on Wednesdsay.

The sources explained that the move would not be to raise resources but to demonstrate the government's pro-poor orientation, discourage wealth accumulation and fight black money.

Globally, the UK is an example where such a tax is levied.

While experts have said this tax will harm a slowing economy needing capital, the Finance Ministry is likely to present it as a "bold and inclusive move" to deny the rich more wealth via inheritance which would create further distortion in wealth distribution in the country.

The Finance Ministry, however, does not think on these lines. Officials said the time is right for levying such a tax, which people can avoid by giving donations to government-approved institutions and trusts for public welfare.

The sources also said the government is looking at re-introducing an estate tax on inherited property and illiquid assets after 35 years. In 2005, the then Finance Minister P. Chidambaram had introduced a banking cash transaction tax (BCTT) of 0.1 per cent on cash withdrawals above Rs 10,000 -- a limit which was later raised to Rs 25,000.

The tax was, however, scrapped in 2009 owing to low collection on this count.

In many countries, the heir must pay Inheritance Tax for inheriting any property or assets from parents, grandparents or any other relative or friend.

Currently, the Income tax Act, 1961, clearly excludes a case of transfer under a will or inheritance from the purview of gift tax. Accordingly, Indian law does not provide for taxation of property received by way of inheritance.

The Inheritance or Estate Tax was abolished with effect from 1985. Once a property is inherited, the owner can choose to sell it subsequently. This way, the capital gain or loss too, will accrue to the legal heir.

Further, the holding period of ownership will determine whether capital gains will apply under long-term capital gains tax or short-term capital gains tax.

Tax experts are unanimous about the negative impact of such a tax.

"Inheritance tax is called an estate duty. It was just a like a wealth tax. All assets of a father to his children minus liablities could be included," tax expert Ved Jain told IANS.

"When the new tax is introduced in order to avoid repurcurssions, government can fix a tax of 5 or 10 per cent on inheritance assets of more than Rs 10 crore . It may not be a big amount, but in India how many people have Rs 10 crore," he said.

"Not much funds can be raised through such a tax. It is not imposed to raise revenues, it is a thought process -- socialist or communist or capitalist. It is not a revenue generating measure. It is a socialist thought. This will harm the economy," Jain added.

According to the expert, "globally, a developed country like US imposes such taxes and there are there no issues. But India is a developing country, needs capital formation. It will seriously affect the industry.

"The major challenge for inheritance tax is the liquidity to pay the tax. If one has shares worth Rs 50,000 crore in a company, if you pay Rs 5,000 crore tax, the person has to sell the shares to pay tax.

"A property of Rs 100 crore will be needed to pay Rs 10 crore tax...where will one pay from?" asks Jain.

(Anjana Das can be reached at anjana.d@ians.in)